What Is Cap Rate in Real Estate?

The capitalization rate (cap rate) is the most widely used metric in commercial real estate valuation. It measures a property's annual return based on its net operating income relative to its market value — independent of financing. This cap rate calculator also computes gross rental yield, cash-on-cash return, and gross rent multiplier for complete investment analysis.

Cap Rate Formula

Cap Rate = (Net Operating Income ÷ Property Value) × 100. NOI = Effective Gross Income − Operating Expenses. Effective Gross Income = Gross Potential Rent × (1 − Vacancy Rate). Operating expenses exclude mortgage payments but include taxes, insurance, maintenance, management fees, and utilities.

Interpreting Cap Rates

Below 4%: typical for prime urban gateway markets; low risk, low yield. 4–6%: suburban core markets; balanced risk-return. 6–8%: secondary markets and value-add properties. Above 8%: tertiary markets or higher-risk properties. Cap rate also equals the discount rate in a no-growth scenario, making it a direct measure of investment risk.

Cap Rate vs. Other Metrics

Cap rate measures unlevered yield — it ignores financing. Cash-on-cash return measures actual return on invested equity after debt payments. GRM is a quick screening multiple. For full analysis, also calculate IRR (internal rate of return) accounting for appreciation and exit cap rate assumptions.